How To Play America's Railroad Boom
[This article originally appeared in the Daily Resource Hunter on April 3, 2013]
The North American railroad revival is in full bloom.
This year, according to the Wall Street Journal, railroads will spend over $14 billion on upgrades to rail yards, refueling stations and additional tracks – that’s up some 40% since 2008’s peak.
Why the extra spending? Well, following along with Warren Buffett’s prescient outlook in 2009, the industry is set to boom for years to come. And while this unexpected revival of the “iron horse” continues there are certainly ways that you and I can cash in.
Today’s railroad revival is as straight-forward of an investment idea as you’ll get.
With mounting fuel prices, along with other rising costs, for trucking and air-cargo the reliability and efficiency of America’s rails system is almost blinding.
Ugh, in another spat of near-sickening brilliance Warren Buffett saw the light back in 2009 – with his purchase of Burlington Northern Santa Fe Corp (BNSF.) At the time, Buffet plunked down a $26 billion bet on the revival of the American economy – railways, in particular. Of note, Buffett didn’t just invest in BNSF he bought the whole dang company, his largest acquisition ever.
Thinking out loud I’m not sure if Buffett was just good on his bet for an economic recovery or REALLY good, by somehow forecasting more oil shipments coming from places like North Dakota’s Bakken formation.
Regardless, the Oracle of Omaha nailed it. And today we’re still in the early innings the next boom era in the railroad industry.
And like most good investment ideas this one was quite unexpected. Fact is, you wouldn’t have to think back too far (think the 80s) since many of the big players in rail were close to going belly up. Back then oil was cheap and plentiful, regulation was relatively loose for the trucking industry (heh, drivers could go for 36 hours straight if they wanted!) and the efficiencies of rail weren’t so obvious.
Today the tides have turned. Energy isn’t dirt cheap, regulations are eating away at trucking efficiencies and overall, rail is back!
Looking at revenue from the top-5 U.S. rail companies, you’ll see the industry is booming since 2009 – that’s the time of Buffett’s buy.
Other than general growth in domestic products (pent up car sales and other domestic goods) much of the growth in last year’s rail volume came from crude oil (and in some cases the sand used for “fracking” shale wells.)
Crude oil is scampering about North America, more and more by rail. Bakken and Niobrara to the Gulf Coast, Permian and Niobrara to California, plus plenty of intra-state rail traffic in Texas. Add it up and a lot more crude is feeling the click-clack of the tracks.
According to data from Union Pacific (UP), the shale industry accounted for 133,000 extra UP carloads in 2012 – that’s an 84% increase from 2011. Indeed, even in the face of a coal shipment fallout, the rail industry is doing better than ever. Goodbye cheap coal, hello expensive oil!
Plus, another added benefit from America’s booming energy industry is that new manufacturing and chemical plants will also need to get their goods from landlocked states to the coast – I’m looking at you Ohio.
From a market standpoint all of the big names in rail are up double digits year over year. – Union Pacific (UNP) up 29%, Norfolk Southern (NSC) up 15% and CSX (CSX) up 10%. Each also pays near a 2% dividend.
Feeding off the same trends, the smaller U.S. rail players have done even better.
Kansas City Southern (KSU) is up 48% year over year. And one company that falls short of the top-5 by revenue, Genessee & Wyoming Inc (GWR), jumped 64% year over year.
Importantly for today’s discussion, the gains for these rail companies are just the beginning…
According to a recent report from the U.S. Department of Transportation, by 2040 demand for rail hauling is expected to increase 50% — to $27.5 billion. Indeed, rising demand for a low-cost industry like rail can lead to some solid long-term gains.
Speaking of low-cost, the costs for rail providers may be getting even lower with the advent of natural gas-powered locomotives. Recently Buffett’s BNSF along with other major railways (including CSX and our neighbor to the north, Canadian National Railway) have begun testing natural gas powered locomotives.
These engines can run on liquefied natural gas (LNG), which provides an amazing cost break. In particular, while a gallon of diesel will run you about $4 the equivalent of natural gas costs about 50 cents.
So while it’s costing more and more to ship via truck or plane, the rail industry could be set for even more cost breaks. That’s a solid long-term trend if I ever saw one.
Indeed, this industry may surprise everyone yet again!
Keep your boots muddy,
Ed. Note: Going forward the rail industry may be able to benefit from America’s shale boom from both ends – more rail shipments of crude and lower costs from cheap natural gas-powered engines. Add that to the revival of regular rail shipments because of the factors listed above and you’ll see that this rail boom has plenty of legs. Stay tuned to my Daily Resource Hunter to learn more as this story develops, including regular opportunities to discover real, actionable investment plays. Sign up for free, right here.
Original article posted on Daily Resource Hunter